FYI | May 08 2007
By Chris Shaw
In recent weeks the US dollar has fallen to record lows against both the euro and the British pound and though it corrected slightly from those levels both Danske Bank and SVB Financial Group see potential for further weakness in the greenback.
SVB’s senior analyst Laurence Hayward sums up the dollar’s weakness quite simply, attributing it primarily to interest rates. He points out the US Federal Reserve is likely to keep rates on hold or possibly move them lower in coming months in response to weakness in the housing sector and the economy overall, but elsewhere interest rates are expected to push higher.
This weakness in the economy is becoming more apparent, as US GDP for the March quarter was just 1.3%, against an outcome of 2.5% in the December quarter last year.
Danske Bank agrees, chief strategist Theis Knuthsen highlighting the possibility the European Central Bank will lift official rates twice more before the end of the year, while a further increase is also expected in the UK. As SVB’s Hayward notes, this has the effect of lower the interest rate differential between the US and Europe, making the euro and the pound relatively more attractive.
Knuthsen also points out capital flows into Europe generally have been positive in recent months, as in contrast to the US the European economy has been relatively strong and is therefore attracting such inflows of funds.
In contrast the bank points out energy prices in the US have been creeping higher, which is likely to impact on consumers and so weaken their contribution to growth. This is a significant factor given the US consumer has been the driving force behind that economy’s growth for some time.
It suggests any slowing in rates of consumption in conjunction with the current weakness in the housing sector will have the effect of increasing the outflow of capital from the US economy and hence push down the dollar, as investors look for more attractive markets in which to invest their capital.
Danske Bank is forecasting the euro to trade as high as 138 against the US dollar in the second half of the year, up from current levels of around 136.